Despite Trump’s Tax Cuts, Economists Still See Slowdown Ahead

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Trump administration officials such as Kevin Hassett, chairman of the Council of Economic Advisers, insist that their tax cuts will provide more than just a short-term sugar rush for the economy. “It’s not a sugar high at all. Because what’s happened is that the capital spending boom that we promised would happen if we passed the tax cuts is underway,” Hassett said at a press briefing earlier this month.

Yet economists, by and large, still see the effects of the recent fiscal stimulus wearing off before long. Case in point: Despite a new, third estimate from the Bureau of Economic Analysis showing that gross domestic product grew at a 4.2 percent annual rate in the second quarter, economists at Capital Economics warned Thursday that they see a slowdown ahead:

"Boosted by the fiscal stimulus, GDP growth is still on track to be a solid 2.8% this year but, as that stimulus fades and the Fed continues to tighten monetary policy, we expect growth to slow to 2.2% in 2019 and only 1.5% in 2020. Our baseline forecast incorporates an economic slowdown rather than an outright recession, but there would be a significant risk of the latter developing in late 2019 or in 2020."

The economists write that “the tax cuts have done little to boost the economy’s supply side.” Overall business investment is still growing briskly, but “business equipment investment has actually slowed since corporate tax rates were cut.” And on the consumer side, they expect spending growth to slow and the benefit of the tax cuts will ebb:

"The fiscal stimulus, which will provide a boost to annual GDP growth of close to 1% point this year, will begin to fade next year, since it was mostly a one-off boost to the level of post-tax incomes. At the same time, rising interest rates will weigh more heavily on rate-sensitive activity. Motor vehicle and existing home sales are already trending lower."

While the economists note that they’d expect any recession in 2019 or 2020 to be “modest,” they add that higher deficits resulting from the tax cuts could limit any policy response: “With the Federal budget deficit climbing to around 5% of GDP there is little scope for further fiscal stimulus.”

As editor in chief, Yuval Rosenberg oversees all aspects of The Fiscal Times' website and email newsletter. His writing has appeared in publications including BusinessWeek, CNBC.com, CNNMoney.com, Fast Company, Fortune, Newsweek, Money and Time.